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Trading the hot sectors can offer some of the most profitable trading opportunities out there. Sectors are made up of a large basket of stocks, so the risk we have with individual stocks potentially moving around in a strange fashion or against the sector, gapping at earnings, splitting or being involved in a takeover bid, is greatly diminished when trading a sector.
The most common way to trade sectors is through Exchange Traded Funds (ETFs). In one way, ETFs are like Managed Funds or Mutual Funds. We have all heard of Managed Investment Funds with titles such as the XYZ Global Resources Fund, Asian Share Fund and European Commercial Property Fund etc, which are essentially a basket of shares all from one particular area of the market. Imagine being able to trade these and buy options on them! ETFs work in the same way, there are hundreds covering different areas of the market or world, and we can certainly trade them with options.
We can trade Gold (GLD), Oil (OIH) or (USO), Energy (XLE), Clean Energy (PBW), Finance (XLF), Agriculture (DBA), Home Construction (ITB), Oil and Gas Exploration (IEO), Base Metals (DBB), The Commodity Index Tracking Fund (DBC), Silver (DBS) and many more. Or there are the various markets of the world as ETFs: The Hong Kong Index Fund (EWH), the Chile Index Fund (ECH), Taiwan (EWT), Mexico (EWW), Switzerland (EWL), Brazil (EWZ) and hundreds more. There are plenty of websites with ETF lists - Google it!
For the options traders one way to gather a list of the ETF’s is through the Optionetics Platinum website. Inside Platinum, click on Create / Edit Lists. Scroll down and under Market Indices select the list ETFs, REIT’s, TRUST’s Optionable and click Replace to save them into My Stock List. Open up ProfitSource and click on the Platinum icon and transfer the list from Platinum to ProfitSource. This list can be run through the Market Scanner for bullish or bearish patterns. To find bullish sectors, perhaps create a Market Scan which searches under HiLites / Elliott Wave for an Elliott Wave 4 Buy pattern, and perhaps a Chart / Price criteria which states Close of the current day is Increasing for the last 60 days. This will leave out the sideways and bearish sectors and keep the bullish ones that have possibly just had a pullback and are ready to run. For bearish sectors change the Elliott Wave pattern to a bearish one, and in the Chart / Price criteria, change Increasing to Decreasing. Look also at ValueGain to confirm that the major companies within these sectors are overvalued or undervalued to increase your perspectives of analysis. Make sure you don’t miss something that could later cost you!
Once you’ve found a bullish or bearish sector, check the news too! The hot sectors are always in the media! – “Higher prices at the petrol pump”, “Gold reaching $1000 an ounce”, “Mortgage Finance companies going bust in the sub-prime credit crisis”, “China booming” and the front page of yesterdays paper – “World’s new crisis: food! Rising food prices – Corn up 31%, Rice up 74%, Soya up 87%, Wheat up 130%”. Top down integrated analysis is a great way for novice and expert Optionetics students to really take trading to a whole new level, just as Tom Gentile and George Fontanills directed in last year’s Oasis conference.
Manage your sectors!
Matt Baker
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